You're assuming a 100% taxed marginal rate after some income level. That seems extremely unlikely. As long as the marginal tax rate is <100%, there will be incentive to work.

But who says income tax is the only type of tax? You can use a progressive consumption tax (no tax under $x item, y% tax from $x to $z, etc) to raise the funds. Economists much prefer this type of tax because it disincentives consumption rather than production.